As part of its $2.6B deal with the U.S., Credit Suisse (CS +0.3%) agreed to two years of oversight by the New York Department of Financial Services, and that agency has picked former TARP inspector general Neil Barofsky for the job.
A frequent critic of prosecutors for being too lenient on Wall Street post-crisis, Barofsky - now a partner at law firm Jenner & Block - has said Credit Suisse's criminal plea and fine. if just perceived as another cost of doing business, will have a minimal deterrent effect.
In his new job, Barofsky will report on whether Credit Suisse has implemented the necessary internal controls to prevent misconduct from happening again.
UBS could nearly quadruple legal reserves to CHF 7B ($7.8B) and still have a common equity ratio of 13% by 2016, say JPMorgan analysts Kian Abouhossein and Amit Ranjan, also including a sizable dividend in that estimate.
In contrast, Credit Suisse's (CS) common equity ratio drops to 9.3% - the lowest of the 17 global investment banks - thanks to the $2.6B U.S. tax evasion fine.
Credit Suisse's investment banking operation, notes the team, is more highly exposed to shrinking fixed income business, generating just 48% of revenue from equities vs. 68% at UBS.
On wealth management, UBS gets the nod because of its stronger position in fast-growing Asia.
As part of tougher increasing changes in Swiss banking rules, the Swiss National Bank has praised UBS (UBS) and Credit Suisse (CS) for increasing their capital, but urged the two to improve their leverage ratios.
The Swiss banks have previously acted on the harder new legislation. UBS has recently shifted from large parts of riskier debt-trading activities towards private banking. Credit Suisse also said last month that it will start paying out approximately half its profits to shareholders once it hits a key capital ratio. It will also reduce assets to attain its 10% capital ratio, which it expects to reach by the end of the year.
U.S. prime money fund allocations to Credit Suisse (CS) fell 8% in May, according to data from Crane, somewhat above the average monthly variance of 4.8%. Overall money fund exposures, however, remain above that of year-end 2013, so the overall fall is not material, says Fitch.
Credit Suisse has $39B, or 2.5% of money fund assets.
At the fund manager level, there were some larger withdrawals, including one who pulled $1B, or 23% of the fund's exposure to the bank.
Amid a number of challenges to bond trading facing the large banks - namely declining revenue and tougher capital rules - Credit Suisse (CS) is considering spinning off its recently-formed Wake USA, which last month began taking trades in Treasurys and Treasury futures, reports the WSJ.
"It's a novel idea," says Larry Tabb of Tabb Group. "By partnering with Tower [a developer of electronic-trading technology], Credit Suisse keeps their client relationships, solves their regulatory capital issues, as well as providing better and tighter pricing to their clients."
For Credit Suisse, turning Wake into an independent company would allow the bank to keep a share of the profits from client trades without having to set aside additional capital.
Credit Suisse (CS) has yet another reason to be excited for Alibaba’s (ABABA) IPO - the bank would make a paper profit of $68M if Alibaba lists at a valuation of $121B, due to $50M worth of convertible bonds it purchased in the group in 2012.
The $68M gains would be a notch higher than the underwriting fees Credit Suisse would see from the IPO. The bank expects to recieve $66M from the offering.
"Underperformance has left CS shares with 35% upside potential to our target price, one of the highest in the sector," says analyst Jernej Omahen, upgrading the stock to a Buy and adding the name to Goldman's Conviction List.
"Our analysis underlines that Credit Suisse's business mix embeds strategic optionality for group ROE expansion that other, non-Swiss, investment banks don’t have." The bank's "reorientation" towards private banking and wealth management could: 1) Improve returns; 2) Improve capital generation; 3) Reduce TBTF risk; 4) Close the valuation gap with UBS, which currently trades at a 51% premium based on 2104 earnings estimates, and a 42% premium based on 2015 price/tangible book value.
Shares +1.4% premarket
Goldman also pulls its Sell rating on Deutsche Bank (DB) citing the recent capital raises (the latest one is today) and the bank's new strategic direction.
"That has been very limited," says Credit Suisse's (CS -0.4%) head of private banking Hans-Ulrich Meister, asked at a roundtable discussion if the bank's criminal guilty plea and hefty fine has hurt business. He notes the bank has lost some work, but there's been new business coming in at the same time.
Last week, finance chief David Mathers said trading revenue has been disappointing in Q2, but not "out of kilter" with that faced by Credit Suisse's banking peers.
"The market has permanently shrunk," says RBC's Gerard Cassidy of fixed-income trading business at banks. FICC income of $22B in Q1 was off 37% from a year ago, and updates recently from the likes of Citigroup (C +0.6%), JPMorgan (JPM -0.5%), and Goldman Sachs (GS -0.4%) suggest Q2 could be worse.
Of the two reasons - a new regulatory regime putting the squeeze on bank business practices and the absence of volatility, one may go away, but the other isn't.
The new regime has banks cutting staff and restructuring units - especially from the likes of European players like Barclays (BCS +0.2%), Credit Suisse (CS +0.3%), and UBS (UBS -0.7%).
“What these companies have decided to do, some more dramatic more than others, is restructure their business,” says Cassidy. “You just have to manage your business differently by realigning your cost structure to the new level of revenues due to the changes form rules, regulations and laws."
The resolution of the U.S. tax issue means it's time to focus on Credit Suisse's (CS) cheap valuation, says Deutsche. The stock was up about 1% last week following the guilty plea and fine, after falling about 5% in the month leading up to deal.
Credit Suisse (CS) has sold bonds valued at $5B just days after agreeing to pay $2.6B to settle U.S. charges that it helped American citizens evade taxes. The offering is in three separate tranches.
Despite the hefty fine, which will reduce Credit Suisse’s common-equity ratio to 9.3% from 10%, the bond market does not look like it is penalizing the Zurich-based giant. S&P and Moody's haven't downgraded their ratings on the bank, although the latter has assigned a negative outlook.
"While the fines are manageable, the financial impact should not be understated," warns analyst Simon Adamson.
At issue are hundreds of suspect trades by clients of Credit Suisse (CS -0.4%), and Finra is also looking into whether those clients' trading operations - often based overseas - violated U.S. anti-money-laundering rules.
Credit Suisse plans to cut times with a number of the firms, say sources, and has given them about two months t find another trading partner.
The probe isn't about HFT, but instead focused on firms employing human traders - often in places like China and India, and regulators have been looking into their actions for years over concern about market manipulation or money-laundering.
The Swiss lender will be able to continue to serve as a counterparty to the Federal Reserve after pleading guilty to tax evasion earlier this year, says the FRBNY.
A New York Fed spokesman noted Credit Suisse's (CS) criminal activities didn't involve its broker-dealer business, and the bank has taken steps to address compliance issues. What he didn't note was that the Fed got a piece of the $2.6B settlement, receiving $100M.
Credit Suisse being allowed to keep its primary dealer status is another sign the criminal plea was for "showin', not blowin'."
Affirming Credit Suisse's (CS +1%) senior debt credit rating at A1 following the tax evasion guilty plea and $2.8B fine, Moody's nevertheless, cuts the rating outlook to Negative from Stable.
Moody's notes the penalty will lower the bank's capital ratio to 9.3% from 9.9%, and while the bank has announced plans to pare assets to bring that number back up, its ratios could remain lower than those of its peers. "The settlement delays the timing of any further improvement in the bank's capital ratios."
“We have found no instances where clients cannot do business with us,” says Credit Suisse (CS) CEO Brady Dougan one day after the bank pleaded guilty to tax evasion and agreed up to $2.6B in fines. “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.”
The deal will cut Q2 income by about $1.8B, and Dougan says CS will pare some assets to try and restore its capital levels.
The day after the well-telegraphed deal, shares are up 1.4% in premarket action.
The DOJ states Credit Suisse (CS) will "pay a total of $2.6 billion – $1.8 billion to the Department of Justice for the U.S. Treasury, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services."
The final bill meshes with a Reuters report stating CS would pay "more than $2.5B."
The bank has pleaded guilty to "conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and other documents with the Internal Revenue Service."